Hexicon Q3'24: Divestments and financing risks still in focus

Recent developments in Hexicon’s project portfolio have been mixed, in our view. While the MunmuBaram project finally received regulatory approval, the Swedish Government rejected two key projects, affecting the valuation negatively. Furthermore, Hexicon is still in need of immediate cash infusion, and we believe it will be difficult for the company to overcome the downward pressure from the expected equity issue, the high cash burn, and the remaining question marks concerning the structure of the MunmuBaram divestment. Against this backdrop, we believe that the near-term risk/reward profile is unfavorable. Consequently, we revise our recommendation to Sell (was Reduce) and lower our target price to SEK 0.14 (was 0.23), reflecting the negative impact of the reduced net capacity in the project portfolio and aligning with our SOTP valuation.

No major surprises in the Q3 figures

Hexicon’s Q3 revenue increased to 3.8 MSEK, above our estimate of 0.8 MSEK. However, in absolute terms, the increase was relatively modest. The company’s Q3 EBIT remained negative at -32.9 MSEK, roughly in line with our expectations. With a continued high rate of cash consumption, the company’s cash position stood at 38.2 MSEK at the end of Q3, with an additional 5.0 MSEK available through credit facilities. Since the company needs to repay a 75 MSEK credit facility by December 2024, it is evident that Hexicon will need to raise additional capital soon. In our view, raising capital through additional debt may not be viable given the already high level of debt. On the other hand, an equity issue at the current valuation would be both expensive and dilutive for shareholders. That said, the recent regulatory approval may strengthen Hexicon’s position for a potential capital raise.

We have adjusted our estimates to reflect the changes in the project portfolio

Hexicon recently achieved a major milestone with the regulatory approval of its MunmuBaram project, allowing the company to focus on establishing a long-term ownership structure for the next capital-intensive phase. However, only two of the three electricity business licenses have been approved, which currently limits gross capacity to 750MW rather than 1,125MW. We believe Hexicon urgently needs to establish a new long-term partnership for the project to secure financing through a partial divestment and continue development. Therefore, we expect the company to partially divest the project in its current form. As our earlier estimates assumed a divestment at full capacity (1,125 MW), we have lowered our 2025-2026 revenue estimates accordingly. While operating cost estimates have been reduced slightly, reflecting Hexicon's focus on core projects, lower revenue estimates have led to a downward revision of our EBIT estimates for the same period. In addition, we have lowered our long-term estimates due to Hexicon's decision to discontinue work on its Cirrus and Dyning projects following their rejection by the Swedish government.

Investment returns are overshadowed by financing risks

Based on our SOTP valuation, we have estimated a value per share of SEK 0.06-0.37 (more details on the valuation range in the Valuation section). Given the uncertainty around a possible MunmuBaram divestment, we believe that the drivers currently justify a valuation towards the lower end of the range. In addition, the falling share price has increased financing risks and the company will need to raise significant financing relative to the current market cap. Without clear positive near-term drivers, the risk of significant dilution calls for caution.